FINANCIAL ADVISORS

Financial markets can seem bewildering to those who don’t have the time and energy to understand them: all that jargon, all those sudden switches in mood. So it is natural that people look for help when trying to find the right products. In America, more than half of all households have sought advice, according to a survey conducted in 2010. They have more than 650,000 registered financial advisers to choose from.
But how good is that advice? It can be hard to tell. There may be an “information asymmetry” between the advisers and the clients, simply because finance can be so complex. Furthermore, although a diner can instantly tell if wine is corked or steak is tough, it may be many years before the success or failure of a financial tip becomes apparent.

A new paper* examines the records of American financial advisers between 2005 and 2015, using a database that contains 1.2m individuals. It finds that 7% of the advisers were disciplined for misconduct over the period, resulting in a median payment to customers of $40,000 in compensation. Around one-third of the miscreants are repeat offenders; past transgressors are five times more likely to engage in misconduct than the average adviser.

What happens to the offenders? Just over half, astonishingly, keep their job. Although the remainder are let go, 44% of them are rehired by another firm within a year. On average, they take a 10% pay cut, but they continue to work as investment advisers. Unsurprisingly, the paper finds that these miscreants tend to move to firms that hire more people with a record of misconduct than is typical. The same firms are less likely to fire their staff if they do something wrong.

Why don’t such firms lose all their clients? The authors suggest that advisers with a dark past tend to prey on elderly or unsophisticated customers. At any rate, they seem to congregate in relatively wealthy, elderly and less educated counties. In some places in Florida and California, one in five advisers has a record of misconduct.

It is a sorry tale. But information on advisers’ records is at least readily available at BrokerCheck, a website run by FINRA, an American regulator. Clearly, a lot more investors need to use it.

About admin

I would like to think of myself as a full time traveler. I have been retired since 2006 and in that time have traveled every winter for four to seven months. The months that I am "home", are often also spent on the road, hiking or kayaking.
I hope to present a website that describes my travel along with my hiking and sea kayaking experiences.